August saw activity at UK factories slump for the second month in a row, according to the closely watched purchasing managers' index (PMI) from researchers Markit and the Chartered Institute of Purchasing and Supply.

The decline was driven by falling new orders for exports, which saw their steepest slide in five years as overseas demand worsened amid intensifying fears for growth.

The index's headline reading dropped to a 26-month low of 49, where anything below 50 signals contraction. The latest figure, coming after July's 49.4 reading, reinforced concerns that manufacturing - recently the UK recovery's success story - will prove a drag on growth as a slowdown hits factories worldwide.

"The second half of 2011 has so far seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear," said Rob Dobson, economist at Markit.

The August slump came as manufacturing contracted in the eurozone for the first time in almost two years, according to the PMI for the region, which likewise fell to 49 - the first time since September 2009 it has fallen below 50.

France, Italy and Spain all saw activity at their factories shrink. That left Germany alone of the region's biggest four economies in seeing its factories keep growing.

However, their new export orders fell at the fastest rate of all the nations surveyed, boding ill for Germany's economic prospects.

Separate figures showed economic growth in Germany slowed to just 0.1 pc in the second quarter, adding to the worrying data for Europe's powerhouse economy. Analysts at Barclays Capital warned an "industrial recession looms" in the eurozone, fears which saw the shared currency lose ground against the dollar.

PMIs for Asian nations added to the gloom, as they showed problems facing debt-laden Western nations are hitting factories in the East as demand weakens. Manufacturing contracted in South Korea and Taiwan as new export orders slipped.

The PMI reading for China from HSBC showed growth in factory activity was still continuing at pace, but at a slower rate than before. "The West's deteriorating growth outlook is becoming an increasingly heavy burden to bear," said Donna Kwok, an economist with HSBC.

An index tracking factory activity in the US just managed to stay in growth territory at 50.6, stronger than markets had anticipated.